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Not much interest in Obama’s small-bank fund

More than $10 billion has been applied for by 702 banks, Treasury says

By

RonaldD. Orol

WASHINGTON (MarketWatch) — Seven months after legislation creating a $30 billion fund was enacted to encourage community banks to lend to small businesses, no money has gone out, and only about 20% of eligible institutions have applied for funding, according to a top lawmaker on Thursday.

“When can some of these banks receive the green light from you?” Senate Small Business Committee Chairwoman Mary Landrieu asked the Treasury Department at a hearing on the statute that created the fund. “Several banks in Louisiana are excited about this opportunity.”

At issue is a statute, approved in September, that seeks to allow banks with $1 billion or less in assets to borrow from the government up to 5% of their risk-weighted assets. (Banks with between $1 billion and $10 billion could borrow 3%.) These smaller financial firms would receive investments that must be used for small-business lending.

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The loans would come with a 5% dividend to Treasury, which could be reduced by 1% (to as low as 1%) for each 2.5% increase in small-business lending conducted by the bank.

According to the Treasury Department, 702 community banks have applied for about $10.1 billion in funding.

At the hearing, Landrieu, D-La., focused on the statute — which in addition to creating the lending fund also provides tax relief for small businesses and increases Small Business Administration lending limits.

The senator said she was encouraged to hear that 702 banks have applied for the program, but noted that this represents only about 20% of 3,700 community banks that so far are eligible to participate. Another 3,000 banks will have the opportunity to apply shortly.

Landrieu also expressed concern that the Treasury hasn’t approved any banks to participate in the program yet.

In response, Treasury Deputy Assistant Secretary Don Graves said the agency is moving as quickly as it can to get the program going. “Beginning in the next few weeks,” he added that dollars will start going out to community banks and that all applications that meet the eligibility criteria will be approved by a September deadline.

“You require us to balance the speed to get it off the ground with making sure we are making prudent investments and protecting taxpayer dollars,” Graves commented.

TARP conversion

However, a large chunk of those 702 applying — 285 banks — are small institutions that already have received taxpayer funds from the Troubled Asset Relief Program, enacted to stem the financial crisis of 2008. The remaining 417 are community banks seeking capital from the program that have not received TARP funds, according to Treasury.

Sen. Olympia Snowe, the Republican ranking member on the panel, expressed concern about how so far there hasn’t been much interest in the program from non-TARP banks. She said the Treasury Department extended the deadline for applications from March 31 to May 16, noting that there has been “lackluster interest” in the program.

“I fear that by extending deadlines, the Treasury may be pushing lenders into the program or too readily approve applications for the initiative to bolster its image,” Snowe said.

She argued that participating TARP banks applying would “essentially be paying off one taxpayer-funded credit card — TARP — with another, in the form of the lending fund.”

Snowe added that TARP banks converting over to the fund will have the opportunity to reduce their dividend payments to the government, but also to eliminate executive-compensation restrictions and costly warrants that came attached to the original TARP program.

“So this begs the question: Isn’t the lending fund proving to largely be a TARP refinancing program?” she asked.

Snowe cited a Treasury inspector general’s report on the fund released last week that said the agency expects only to distribute about one-half to two-thirds of the $30 billion authorized.

Those TARP recipients that aren’t late on their dividend payments are expected to be permitted to convert their TARP stakes over into the new program.

However, Paul Merski, chief economist at the Independent Community Bankers of America, insists that most community banks are well capitalized and don’t need to borrow from the fund now, as lending is starting to return.

He pointed out that a large number of the banks seeking capital are not TARP recipients, and those that are have a legitimate reason to seek to participate, because the program gives them an incentive to lend to small businesses by lowering the dividend they need to pay Treasury as they increase lending to small businesses.

“This program has a carrot and stick for increasing small business lending,” according to Merski. “It’s a far more small-business friendly program than TARP was. This is not a program to bail out banks. It is a program that gives banks, which demonstrate they have an opportunity to lend, the capital to assist them in small-business lending.”

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